Day 7- we started out by looking at chapter 10, which focused on financing new businesses. One of the things that we are constantly told about entrepreneurship is that you cannot be afraid to fail. The reason that we are told this so often is because it is hard to be an entrepreneur; not only it is hard just to get started in owning your own business, it is even harder to be successful. The statistic that is given in the book is that around 20% to 25% of new business fail from bankruptcy within the first eight years. The other 75% to 89% are terminated due to owners selling the business, changing operations, or owners retiring. Now, this does not mean that the entrepreneurial venture was unsuccessful. We saw that one entrepreneur on Shark Tank said a previous venture he created and sold within 18 months.
The chapter then moved on to look at some of the ways to finance a new business. There are three different ways to finance with: earning, equity, or debt. There are benefits to using all three of these different types of financing. Being in corporate finance last semester, I learned a fair amount about types of financing. Before that class, I usually just assumed the best way to finance was by putting in your own money or using money the company earned. One of the most interesting things I learned was that it can actually be very beneficial to use debt to finance ventures. One of the main reasons is that you can use the interest you pay as a tax shield, which can be extremely beneficial. Another benefit is that, by using debt financing, you can get a greater return on your investment. For example, if a project is going to cost $100 dollar and return $150, if you use entirely your own $100 you get a 50% return. However, if you use half debt, then you are using $50 of your own cash and $50 of the banks, but now you still get a return of $150, thus now your return on your own money is 100%! This is a very basic example because you are not accounting for interest expense and various other factors, but I thought that was just one of the most interesting things I learned.
The chapter then looked more in depth at different types of financing. There are gifts and grants that are available to new businesses that can be helpful. These are especially nice because you do not have to pay them back. You can also go with the traditional types of financing, such as getting a loan from a bank. But, if this is your first business you are starting, banks are often weary of loaning money. There is also important type of investing that is used in new businesses, which is using venture capitalists or angels. There are basically people who have already earned a bunch of money, and they are often entrepreneurs themselves. This is almost what you could callShark Tank. There are many different ways that this type of financing is set up, but it usually is just a loan that the entrepreneur has to pay back, or, another common way, is just to give up equity in the company in exchange for the cash.
The episode of Shark Tank that we watched today was interesting. The first entrepreneurs basically put LED lights in a cooler. It is a pretty decent idea, but I think the key to their product was the fact that they had it patented. They ended up making a deal with Kevin, which I think was a decent idea because he will be able to get them setup with larger cooler manufacturers and they can just make money off of the patent. I believe the deal was that Kevin gets something like 33% of their profit from royalties. Which is a lot of royalties, but I think they made good decision because in the long run it will make them much more successful by havingKevin help them. The second product was basically just a big meat shot. This also did sound like a good idea because, according to the judges, it was delicious meat. But, I think all the “sharks” knew that there was a bunch of competition and this was just not a project they were going to make a bunch of money on.
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